Case Studies

Case Study for Retirement Plans


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Ongoing Design Analysis

The Issue

A local health services company established a 401k retirement plan to replace their current 403(b) Plan. With 403(b) Plans, if universal availability is met, then there is no requirement to perform discrimination testing on the elective deferrals made by highly compensated employees. A 401(k) Plan alternatively must perform this test (referred to as the ADP test) to determine if the level of deferrals made by highly compensated employees are discriminatory and if so, must refund any excess deferral contributions to the affected individuals. Due to initial participation levels and lower contribution rates, highly compensated employees were receiving refunds on an annual basis.

The Solution

Under pre-final 403(b) regulations, Plan sponsors could only exclude certain employees under universal availability. One of these options was to exclude employees who are eligible under another 403(b) of the employer, a 457(b) eligible governmental plan, or a 401(k) Plan.

As there was currently also a 401(k) plan in existence, Summit unfroze and amended their 403(b) Plan so that only highly compensated employees could make salary deferral contributions to the 403(b) while all other employees made salary deferral contributions to the 401(k) Plan. Using this plan design feature, the refunds to highly compensated employees ceased as the 403(b) was exempt from the ADP test by law (satisfaction of universal availability) and the 401(k) Plan contained only non highly compensated employees, thus automatically passing as no highly compensated employees were considered benefiting.

The Summary

Thanks to the final 403(b) regulations, Plan sponsors of 403(b) Plans are being forced to adhere to more stringent record keeping, testing, and plan document requirements that their for-profit 401(k) counterparts must adhere to. Even though the final 403(b) regulations did not preclude this plan design feature, the Plan sponsor now had other considerations to weigh on this type of plan design feature. Added administration and audit costs now play a key role in appropriate plan design.

Retirement plans of all types are living and breathing entities. A plan design that may be appropriate today may or may not be tomorrow. It is very important that Plan sponsors are kept abreast of all changing rules and regulations that affect their Plans. At Summit, as part of our ongoing Plan reviews, we present to our Plan sponsors the latest changes or proposals in the regulations that govern their Plans. This is an extremely crucial step in the administration of a Plan. Without it, sponsors would not be able to make informed decisions on their benefit, rights, and features to take advantage of new opportunities available to them.

The preceding are hypothetical case studies and are for illustrative purposes only. Actual performance and results will vary. These studies do not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.